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TEST BANK: WORKING CAPITAL MANAGEMENT

(Difficulty: E = Easy, M = Medium, and T = Tough)

Multiple Choice: Problems
Easy:
Sales collections
1

.

$55,000
$47,400
$38,000
$32,800
$30,000

Accounts receivable balance
.

Diff: E

$194,444
$ 57,143
$ 5,556
$ 97,222
$212,541

Cash conversion cycle
.

Answer: a

If Hot Tubs Inc. had sales of $2,027,773 per year (all credit) and its
days sales outstanding was equal to 35 days, what was its average amount
of accounts receivable outstanding? (Assume a 365-day year.)
a.
b.
c.
d.
e.

3

Diff: E

The Danser Company expects to have sales of $30,000 in January, $33,000
in February, and $38,000 in March. If 20 percent of sales are for cash,
40 percent are credit sales paid in the month following the sale, and 40
percent are credit sales paid 2 months following the sale, what are the
cash receipts from sales in March?
a.
b.
c.
d.
e.

2

Answer: d

Answer: d

Diff: E

Spartan Sporting Goods has $5 million in inventory and $2 million in
accounts receivable.
Its average daily sales are $100,000.
The
company’s payables deferral period (accounts payable divided by daily
purchases) is 30 days.
What is the length of the company’s cash
conversion cycle?
a. 100 days
b. 60 days
c. 50 days
d. 40 days
e. 33 days

Chapter 22 - Page 1

the average age of accounts receivable is 60 days. e.Page 2 . Construct a single month’s cash budget with the information given. Forty percent of its customers pay in the first month and take the 2 percent discount. d. what is the length of the firm’s cash conversion cycle? a. Assuming a 365-day year. The remaining 60 percent pay in the month following the sale and don’t receive a discount. e. What is the average cash gain or (loss) during a typical month for Chadmark Corporation? a. Answer: a Diff: E For the Cook County Company. Other payments for wages. Answer: c Diff: M Chadmark Corporation’s budgeted monthly sales are $3. b. rent.500. c. d. 87 90 65 48 66 days days days days days Medium: Cash budget 5 .600 $ 800 $ 776 $ 740 $ 728 Chapter 22 . $2.Cash conversion cycle 4 . and taxes are constant at $700 per month. the average age of accounts payable is 45 days. and the average age of inventory is 72 days. b. c. Purchases for next month’s sales are constant each month at $1.000. Chadmark’s bad debts are very small and are excluded from this analysis.

CHAPTER 22 ANSWERS AND SOLUTIONS Chapter 22 .Page 3 .

000/$100. 3 . Cash conversion cycle Cash conversion cycle = Answer: a Diff: E Inv.20)($38.000 1.000) .98  0.000. 5.000. collection Pay.000) + (0.1.800 2. collection Pay. determine the firm’s cash conversion cycle: Cash conversion cycle = 50 + 20 .027.40  $3.000) (1. Sales collections Answer: d Diff: E March receipts = (0.000.00  0.500 700 2.40)($30. deferral = + – . conversion Rec. 2 . Rec.000. Cash budget Construct a simplified cash budget: Sales Collections (same month’s sales) Collections (last month’s sales) Total collections Purchases payments Other payments Total payments Net cash gain (loss) Answer: c $3.444.000) + (0.40)($33.60  $3.000/$100.45 = 87 days.000 = 20 days. Inv = $5. Accounts receivable balance Answer: a Diff: E Accounts receivables = DSO  Sales per day = 35($2.000) = $32.000.000. Step 3: Given data and information calculated above. deferral + – period period period = 72 + 60 .976 1. Cash conversion Inv. = $2.30 = 40 days.000 = 50 days.000.176 1. Cash conversion cycle Answer: d Diff: E Facts given: Payables deferral period = 30 days.200 $ 776 Diff: M (0. Step 2: Determine the receivables collection period: Receivables collection period = Receivables/Daily sales = $2. Step 1: Determine the inventory conversion period: Inventory conversion period = Inventory/Daily sales = $5.773/365) = $194. ADS = $100.800. conversion Rec. cycle period period period 4.